Should Australia Introduce Any Tax Or GST Changes? Essay, Research Paper

Why do we need taxes?

Taxation makes up majority of our government’s

income. With this income the government can provide us with proper infrastructure

and social services for little, if no cost at all. These include Medicare,

social security and education. (These facilities are known as recurrent

expenditures because it is needed time after time.)

Other expenditures include transportation,

lighting, recreation etc. These services are granted to us at no costs.

In many 3rd world countries where taxation is low or doesn’t exist, all

of these services are to come out of one’s own pocket.

Over the many centuries, in which taxation

was existent, people have cheated and avoided paying these taxes. Nowadays

people with high-income put their money into trusts, superannuation, or

incorporate it into businesses. Businesses would try and receive more cash

transactions. This has led to a decrease in our government’s revenues,

thus leading to a tax reform in hope of a more effective result.

What makes a good tax system?

There are four elements in a successful

tax system. They are effectiveness, efficiency, equitability, and simplicity.

1) Effectiveness: is the performance compared

to the desired effect. E.g. the number of people who pays tax, how much

tax is received.

2) Efficiency: is the cost of running

the system. The system may be very effective with a million tax officers,

but it would cost millions to hire so many people.

3) Equitability: is the fairness of the

system. This is an impossible goal to achieve. From different people’s

point of views, the system will always be unfair to them in some way. Not

to mention the tax cheats. The best solution is to broaden the number of

people who pay the tax, which is only fair.

4) Simplicity: A tax system should never

be too complexed, it is otherwise not efficient neither understandable.

The income tax Act that just started off at just 120 pages in 1936 is now

over 3300 pages and has doubled in size over the last 7 years. A complex

system means that those who can afford expensive tax advice minimize their

tax. But those that can’t, pay the full share. It is impossible to have

a system where all four elements are satisfactory. Where a system may be

effective and efficient it will not be equitable or simple. It is impossible

to fit the whole population all under one roof. Under these circumstances

the government proposed a new way of taxation- GST.

What is GST?

GST is a tax on the goods and services

that each and everyday households consume. Tax is collected at each stage

of production and distribution, but a credit is given for the GST on inputs.

Refunds are given for GST on exports. Therefore, only households bear this

tax. Australia currently has a WST in place of a GST. WST is whole sales

tax this tax is levied on the whole sale price and is collected by wholesalers.

A GST is in fact a VAT-value added tax. Meaning it is levied at each stage

of production and distribution. Over one hundred countries in the world

have a GST/VAT, but only six nations including Australia have a WST.

The advantages and disadvantages of a GST

It is hard to say whether the GST is favorable

or adverse because the government hasn’t yet proposed the whole system,

the exemptions and the exact figures of taxation. The following is only

speculation by the many supporters and those who disapprove.

ADVANTAGES

1) Lower taxes means business can buy

and sell more competitively overseas.

2) The higher cost of prices will slow

down inflation.

3) At each level of production and sale,

except sale to a consumer, a rebate is claimable. The paperwork for these

claims helps to enforce compliance. This would also stop tax evasion.

4) It will hit the black economy because

the money earned will be used for consumption.

5) Replace existing distortional indirect

taxes

6) Prices on some good and services will

fall instead of rising. E.g. petrol

7) Less income tax gives people more incentive

to work.

8) The reduction in many taxes that were

of a heavy burden to businesses will be abolished thus giving the businesses

more power to employ extra workers. These taxes include the WST and many

other excise duties such as the taxes on many house hold goods.

10) The GST will be able to with stand

tomorrow’s many challenges which the current system will not be able to

handle. E.g. an aging population.

11) Current indirect taxes are levied

on a limited array of goods, which are a declining proportion of household

budgets. This problem can be solved only with a broad-based tax system

such as the GST.

12) GST will be simpler than the existing

system.

13) Last but not least, foolishly yet

truthfully the liberal party claims that the robust system of taxing goods

and services is to provide the government with the capacity to fund-through

increased taxes and revenue.

DISADVANTAGES

1) Even with less income tax people will

be declined to spend as much as before, consumption will decrease.

2) If the introduced GST was to be equitable

and effective, it will have many exemptions, thus leading to complication.

3) Many services will lower their prices

in order to receive cash thus avoiding the GST.

4) With the introduction of GST, the government

also has to increase social welfare and many other government services

to keep up living standards.

5) The following years in which a GST

will be introduced, the inflation will stay very low thus many coin/note/bond

holders will transfer their money to the government. And most importantly,

yields the government billions through its impact on collection from the

progressive personal income taxes. With out inflation this taxation by

stealth disappears. This will benefit the community, but the government

will need to raise its tax revenue is it wants to increase expenditure.

6) If assumed without any exemptions,

many luxury goods that were highly tax by WST will now be cheaper, advantaging

the minority rich people of Australia.

7) Higher prices on goods and services

will discourage tourism. Thus unemployment will rise.

8) Higher interests due to GST will mean

that current mortgage owners will have to pay more.

9) Due to the abolishment of WST, families

that current rent and don’t own a property will have to pay more to buy

a house and more to rent. (Real estate commission will rise, building materials

will rise etc.)

10) It could lead to a state where employees

feel they need more money to support their family (especially those with

only one member working) and go on industrial strikes this will trigger

a series of severe fund loss from the government.

11) The reduction to custom duty may advantage

businesses that import from overseas but it has also left many Australian

businesses unprotected from foreign funds. Overseas businesses are already

more competitive than us, with the reduction to the custom duties, they

will be even more dangerous to us.

12) The system will not be fair towards

those with the lowest income bracket, children and those who worked all

their life and have just retired to pay GST for the second half of their

life.

In all, there are hundreds of arguments

for each side, and there is no proof of any of it being true. We can only

comment when it is put into practice, then and only then do we know if

it is as good or is it as bad as they said.

Do we need any tax changes?

As mentioned before, the government has

added bits and patched parts of the Australian tax system over many years.

The liberal party who supports a GST thinks there needs to be changes,

not only minor patches but to change the whole system. They have put up

a list of reasons why our system is working badly. They put their reasons

into three main categories. An unfair system, An out dated system, and

a complex system.

AN UNFAIR SYSTEM

Statistics show average Australian income

earners have had to pay three times more tax now than we had to forty years

ago. People are paying almost half of their income to the government especially

wage and salary earners who are hardest hit by this. Such high taxation

reduces the incentive for people to work, save and learn but encourages

them to avoid being taxed. They join the ‘black economy’ through such practices

as:

Paying employees ‘cash in the hand’

Taking a job, or a second and not declaring

the income

Cheating on social security, by not declaring

income or

Not reporting cash sales.

Let’s face it, with such a ‘wonderful’

social security system, many families could be much better off taking the

dole than working.

AN OUTDATED SYSTEM

The income tax and WST were both introduced

in1930 and up till now both are encountering problems of efficiency. The

WST was introduced as a method of battling the Great Depression. It was

imposed on goods only at a rate of 2.5%. This 2.5% changed when it was

WWII. The government introduced multiple rates as a wartime necessity measure

“This Government has now found it necessary to introduce a different rate

of tax, and also to vary certain principles of the tax, in order to meet

the extraordinary cost of the war in which we are now involved.” (Mr. Fadden,

Treasurer, 10 Dec 1940). This amount never looked back. Now, household

appliances such as radios, watches, tape recorders etc. are taxed at the

32% rate.

Back in 1930, Australia mainly produced

goods unlike now in the 90’s services are a larger part of the economy

than goods. The WST is not only old but also uncommonly used. As mentioned

before, only half a dozen of nations in the world still adapt it, and most

of those countries have already began to introduce VAT. But Australia remains

adamant. And because of this, it was necessary for the government to increase

revenue, which was lost to the lack of taxation from goods. They decided

to increase sales tax. In every day households, we pay hidden sales taxes

on most goods. These include: 22% on detergent/cleaners, 12% on flavored

milk, juice, ice cream, biscuits etc. Milk, bread, fruit, vegetables, eggs,

flour, meat and butter are the only exceptions. In the bathroom, cosmetics,

shampoo, soap, deodorant, toothpaste, toilet paper etc. are all taxed at

22%. The hand basin, bath, toilet and towels are taxed at 12%. Toothbrushes

and medicated mouthwashes are excepted. The list goes! on, from lounge

to the garage. Manufacturers facing a price increase problem tries and

classify their product into the lowest possible rate. This creates a recipe

for aggressive tax practices. This often results in a windfall gain to

retailers. As well, the sales tax applies to exports, thus making us less

competitive leading to less job opportunities. The WST just has too many

mistakes and unfairness in it we need a better, more advanced system.

A COMPLEX SYSTEM

Australia’s current taxes are a mess.

As mentioned before, the income tax ACT have increased twenty seven times

in size from 1936 till now. There are too many tax brackets for different

people and too many exceptions that not even your tax return agent could

remember. The sales tax classifies goods into one of seven hidden rates:

0, 12, 22, 32, 37, 41, or 45%. This is not only unfair and complicated,

it is also absurd, leading to situations such as where toothpaste is taxed

but toothbrushes aren’t. It is also costly because the combination of different

rates requires businesses, the tax office and courts deciding which goods

fit into which categories and which rates. And that is only sales tax!

There are many other indirect taxes looked after by different levels of

government. These include: WST, excise duties, custom duties which are

looked after by the commonwealth government. Payroll tax, stamp duty, financial

transactions taxes, motor vehicle taxes, gambling taxes, land t! axes and

rates which are looked after by the state and territory government. Theses

taxes may prove to be effective in that it raised sixty billion in 1996-7

(one third of total tax revenue) But it definitely isn’t simple and is

very inefficient to run.

Principles of tax reform

On Nov 6th 1997, the federal, state and

territory governments agreed that Australia needed a fundamental change

to its tax system as we enter the twenty-first Century. Before that, the

government has already set up a Taxation Task Force who prepared options

for the changes to our taxation system. The following were their goals.

there should be no increase in the overall

tax burden

any new taxation system should involve

major reductions in personal income tax with special regard to the taxation

treatment of families

consideration should be given to broad-based

indirect tax to replace some or all of the existing indirect taxes

There should be appropriate compensation

for those deserving of special consideration and

Reform of Commonwealth/State financial

relations must be addressed.

The Prime minister has indicated that before

the next election, the Australian public will have a clear idea of the

government’s plans for modernization and reform of Australia’s taxation

system.

In all, people believe Australia should

have a tax reform. The current system does have too many loopholes for

cheats to fit in. A GST may be an idealistic idea but not realistic for

the time being. Through the 1992 election between Mr. Keating and Dr. Hewson,

it is clear that the public fears the GST. It could be that most are not

sure what it really is. There is need for time and education about GST,

allowing voters to understand it. Until then, it’s going to be a long harsh

process planning and considering all the aspects of a healthy and fair

taxation system.